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Taotian needs new leverage

On August 15, Alibaba released its first financial report for the 2025 fiscal year. In this report, Alibaba's new growth leverage potential emerged.

The financial report shows that in Q1 2025, Alibaba achieved revenue of 243.24 billion yuan, a year-on-year increase of 4%; thanks to the reduction in losses or even turnaround of businesses such as Alibaba Cloud and Cainiao, the group's overall adjusted EBITDA for the quarter was 45 billion yuan, 2.5 billion higher than expected.

However, Taotian Group, which has always been its core business, showed signs of declining profitability this quarter:

After being involved in refund-only and ultra-low prices, Taotian ushered in digital optimism: this quarter's order volume growth reached double digits, and GMV growth also reached high single digits. However, the revenue and profit behind the carnival were lower than expected. This quarter, Taotian achieved revenue of 113.373 billion yuan, a year-on-year decrease of 1.37%, and adjusted EBITA (48.81 billion yuan) decreased by 1% year-on-year.

According to our observations, the main reason for the convergence of Taobao's profits lies in the inevitable requirement of Alibaba's drastic internal reforms: in order to ensure that each organization can build up high combat effectiveness in the next cycle, sufficient calculations have been made on the issue of internal interest distribution, resulting in a "rebalancing" of interests among organizations.

In a sense, this is also Taotian’s proactive “clearance” behavior, laying the foundation for subsequent healthy and organic growth.

Returning to the business level, we can see more clearly thatTaotian Group has made various arrangements to cope with the counter-cyclical situation - reducing the number of entries and expanding the shelves.

First, the company reduced its participation in the competition to save resources. The self-operated retail business proactively cut asset-heavy, low-turnover consumer electronics and home appliance businesses, leaving behind asset-light, high-turnover daily necessities. In Q1 2025, the self-operated business structure was adjusted, and the business line revenue shrank by 9.5% year-on-year to RMB 27.3 billion.

Secondly, it is to allocate resources to consolidate its own endowment. Taotian’s resource endowment has always been the complete range of products, categories and brands in the shelf e-commerce. We believe that under the competition for existing stocks, Taotian’s continuous allocation of resources to customer experience and small and medium-sized businesses is not focused on seizing the low-price mindset, but on covering products of different price ranges and consumers with different spending power.

At present, the implementation of refund-only and the restart of 1688 has sacrificed the monetization rate in the short term, resulting in a year-on-year growth of only 0.6% in CMR (customer management revenue), which is the largest part of Taotian Group, and lower than the expected 3%. However, it has brought a wider price range and richer product supply.

The policies of exempting merchants from annual fees and charging service fees based on transaction volume that were gradually implemented in August and September, as well as the policy of unbinding some merchants from the refund-only rule through service rating, are all aimed at expanding Taotian shelves on the supply and demand sides.

Finally, we should amplify the leverage effect of key categories and seek new growth in the competition for existing products: We believe thatTmall Beauty is Taobao's next growth lever. This business directly determines the effectiveness of Taobao Group's defense and even offense in the next e-commerce war.。

The two meanings of beauty and makeup to Taobao

Since it has decided to concentrate resources on platform services, Taobao must find an important and special category to boost overall customer management revenue, and beauty products are an excellent starting point.

On the one hand, the beauty industry has a great leverage effect on boosting e-commerce performance.——Due to its cultural attributes, the beauty industry has a higher demand for brand building than other industries, so the marketing (channel) budget is generally higher than other industries.

According to Shenwan Industry Classification, the 32 A-share listed beauty care companies will generate a total revenue of 91.185 billion yuan in 2023, with sales expenses of 24.581 billion yuan in the same period, and the average sales expense rate of the industry is as high as 26.91%. Among them, the average sales expense rate of 8 To C brand cosmetics companies is as high as 41.58%, contributing nearly 60% of sales expenses.

For reference, the textile and apparel industry has an average sales expense ratio of 11.04% for 61 A-share listed companies. With a total revenue of 472.629 billion yuan, the total sales expenses ultimately contributed were only 52.193 billion yuan.

In contrast, for e-commerce platforms, the value of accompanying the growth of beauty companies cannot be ignored.

on the other hand,With the long-tail trend of consumer categories, beauty products have become the main battlefield that Taobao cannot afford to lose due to its spillover effect.。

Taking the "China E-Commerce Report (2019)" released by the Ministry of Commerce in 2019 as the base, and supplemented by Star Map data, we can see that the proportion of CR10 categories in China's online physical retail categories has dropped from 90.9% to 86.4%. Long-tail demands such as sporting goods, gold and silver jewelry, hardware and electrical materials, and even building decoration are gradually emerging.

Figure: Statistics on changes in online physical retail categories, Source: China E-commerce Report, Star Chart Data

In our report "JD Subsidy for Beauty", we mentioned the importance of female consumer power in the recovery of consumption, and focused on describing the spillover effect of the beauty category: it can attract highly sticky female consumers, who have the main decision-making power in many consumption scenarios, thereby comprehensively boosting the transaction vitality of many long-tail categories.。

This article will not elaborate on the importance of the beauty category to e-commerce platforms in general, but it is necessary to focus on the significance of Tmall Beauty to Taobao.

The growth of white-label merchants that take on long-tail demand has driven the rapid rise of Douyin, Kuaishou and Pinyin. Under the successive impact of content e-commerce and vertical e-commerce, Taobao's GMV market share has dropped from 80% to 36.5% in 2023.

After giving benefits to consumers and shifting traffic to small and medium-sized businesses, Taotian Group has been continuously trapped in a state of order growth rate > GMV growth rate > revenue growth rate > profit growth rate, and the demand to stabilize the basic plate has become more and more urgent.

In 2023, Taobao beauty products will have a market share of 22.6%, which is lower than the total GMV market share but also has leverage and spillover effects. It is the driving force point with the highest growth ceiling at the current stage.

Taobao Beauty 3.0

As the pioneer of shelf e-commerce, Tmall Beauty has benefited from the first-mover advantage in technology infrastructure, traffic distribution mechanism and operation model. The mentality established by it can still serve as a comparative advantage of Tmall Beauty:

Phase 1.0: Infrastructure is king: Due to the lack of soil and tradition for independent e-commerce sites in the local area, Taobao Mall has begun to focus on building a D2C base since it was first renamed Tmall in 2012.

From 2014 to 2017, Tmall focused on the beauty industry, and international brands dominated the Chinese beauty market. Tmall gradually attracted international beauty brands such as L'Oreal, Estee Lauder, Lancome, Fresh, MAC, and Kiehl's to settle in, and Tmall's beauty flagship store began to be linked to the Chinese official website. To this day, international beauty brands entering China will open Tmall flagship stores, which has almost become the default rule of the game.

Phase 2.0: User mind is king: The same D2C logic continued into the stage of the rise of domestic products. In 2020, Huaxizi and Li Jiaqi marked the first year of domestic beauty products, which directly established its position as the number one in the Taobao beauty market share.

Phase 3.0: ROI is king: Industry data shows that it takes an average of three product iterations for a beauty company to build its brand. The dividends of domestic beauty products have become flat, and the extensive marketing has brought down a number of companies that have not yet completed branding. Qingyan data shows that at least 1,800 cosmetics companies established in the past seven months have "closed down" or "disappeared."

The competition at the top is even more intense. On August 27, PROYA released its semi-annual report, with revenue reaching 5 billion yuan in the first half of 2024. It is expected to become the first beauty brand with revenue exceeding 100 million yuan this year; followed closely by Hanxuan (3.502 billion yuan) and Shanghai Jahwa (3.321 billion yuan) for the second place.

The cruel law of survival has forced beauty brands to repeatedly open the ROI calculator. Although they have left the "official website operation" to Taobao, the marketing budget has been allocated to Douyin, Kuaishou and other platforms that occupy users' attention. This is the main reason why the market share of Taobao beauty products is lower than the market share of total GMV.

Fortunately, this logic of "making wedding dresses for others" is undergoing major changes: Taobao is trying to leverage the potential category of beauty and cosmetics by adjusting the platform rules in order to trigger fission.

Previously, Taobao's traffic tilted towards small and medium-sized businesses, increasing the Taobao (Taobao + Tmall) beauty market share to 23.1%; in September, the policy of canceling the "platform annual software service fee" and switching to "basic software service fee" will be implemented, which is expected to lay a solid financial foundation for Taobao's beauty to further grow bigger and stronger.

In a nutshell, Tmall Beauty is the pillar of Taobao.